India Equity Market Briefing

By Guneet Singh Sahni - Indian Market

Indian markets rallied for the third consecutive week boosted by political stability and declining oil prices. The major market mover for the week was the survival of the Indian government in the trust vote. As a result, the BSE Sensex posted its biggest absolute gain in four months on Wednesday as the political instability hovering around for weeks came to an end. The market expects the current government to bring in reforms in the Indian Banking, Insurance and Pension sector by allowing more overseas investments. However, the last two days halted the week long gain, and investors booked profits once triggered by disappointing Reliance Industries (NSE: RELIANCE.NS) quarterly results, concerns over deficit rains in Western and Southern parts of the country and negative global cues. Even the below expected Inflation number of 11.89% failed to provide momentum on Friday.

India-US Nuclear deal to go through

The news of the ruling UPA Government winning the trust vote was welcomed by the White House and Indian market. The turn of events will help the survival of the Indo-US nuclear deal, which was signed way back in July 2005 between Manmohan Singh and George Bush. The deal will allow India to meet its energy requirement by purchasing nuclear fuel and technology without joining the Nuclear Non-Proliferation Treaty (NPT). However, the deal still needs the approval of several bodies, including the UN’s International Atomic Energy Agency (IAEA) and 45 member Nuclear Supplier’s Group (NSG). It is expected to be ratified by the US Congress by the end of 2008. The potential of the deal is worth billions of dollars to US and European nuclear supplier companies, as the world nuclear association has forecast that India will add 20-30 new reactors by 2020. This will require an investment of more than $57 billion. Global majors like Areva (Paris: CEI.PA, NSE: AREVA.NS), Rolls Royce (OTC: RYCEY), Mitsubishi (Nasdaq: MITSY), Siemens (NYSE: SI), Alstom (EPA: ALO) and GE (NYSE:GE) have already made their first moves in India eying this future potential.

Indian stocks which gain from this deal include Larsen & Toubro (BOM: 500510), Bharat Heavy Electricals (BOM: 500103), National Thermal Power Corporation (BOM: 532555), Gammon India (BOM: 509550), Reliance Infrastructure (BOM: 500390), Hindustan Construction Company (BOM: 500185 ), Alstom Projects India Ltd (BOM: 532309), Tata Power Company (BOM: 500400), Areva T&D India (BOM: 522275) and ABB India (BOM:500002 ).

Inflation

WPI inflation for the week ended July 12 declined marginally to 11.89% Y/Y (11.91% the previous week), against the consensus estimate of 12%, on back of a high base effect in the previous year. Inflation was 4.76% a year back. Poor monsoon conditions in the southern parts of the country led to an increase in primary food article prices, which in effect increased primary articles prices by 10.15% Y/Y (9.92% last week). Manufacturing articles prices increased by 10.7% (10.8% last week). Fuel inflation continued to remain stagnant at 16.9%. Inflation continues to hover around 13-year high levels, but has moderated slightly from last week’s number of 11.91%. The lower-than-expected inflation figure, however, cannot be taken as a sign of inflation peaking. In the case of prices of primary articles and manufactured food products, monsoon conditions have a key role to play.

Markets Ahead

Monday

Quarterly results from HDFC Bank Ltd (NYSE: HDB), Sterlite Industries (NYSE: SLT), Bharat Petroleum Corp (BOM: 500547), Hindalco Industries Ltd (BOM: 500440), Larsen and Toubro Ltd (BOM: 500510), and Sun Pharmaceutical Industries Ltd (BOM: 524715) will start the week.

Tuesday – All eyes on the RBI quarterly rate review

Market direction next week will be decided by the quarterly policy decision of the Reserve Bank of India (RBI), due on Tuesday, through which a rate hike is expected. Inflation is already hovering at a 13-year high and had crossed RBI's comfort level of 5% way back in February 2008. The Street is expecting RBI to hike rates by 25-50 basis points on Tuesday. The government has already taken supply side measures including export bans and price controls that have not been effective in bringing inflation down. With limited fiscal options and elections looming large in 2009, the burden of fighting inflation will fall on monetary policy. In the current fiscal year, the CRR has been raised by 125 BPS, from 7.50% to 8.75%, while the repo rate has been raised by 75 BPS, from 7.75% to 8.5%.

We believe that lower incremental inflation will not lead the RBI to leave its rate unchanged, as the prevailing risks should drive more tightening measures; especially because the money supply growth at 20% continues to remain higher than the 17% target for FY08.

Cairn India Limited (BOM: 532792), Hero Honda Motors Ltd (BOM: 500182), NTPC Ltd (BOM: 532555) and Ranbaxy Laboratories (OTC: RBXLY) will announce their quarterly results.

Reserve Bank of India (RBI) governor Y.V. Reddy will hold a press conference in connection with the annual policy for 2008-09 at 3:00 PM Indian Standard Time.

Wednesday

ITC Ltd (BOM: 500875), Mahindra and Mahindra Ltd (BOM: 500520), Power Grid Corp. of India Ltd (BOM: 532898), Punjab National Bank (BOM: 532461), Suzlon Energy Ltd (BOM: 532667), Tata Motors (NYSE: TTM) and Unitech Ltd (BOM: 507878) come out with their quarterly results.

Thursday

India’s biggest realtor DLF Ltd (BOM: 532868), Tata Steel Ltd (BOM: 500470) and Reliance Communications (BOM: 532712) will release their results.

Outlook

While crude prices have significantly declined from their peak levels, the absolute price level is still too high for comfort. We believe that volatility is going to persist this week on the back of the RBI policy decision and derivatives expiration. Quarterly results have been in line with expectations on an aggregate basis. We believe that the jump over the last two weeks can be viewed as just another strong bear market rally. This rally could sustain if the RBI delivers a benign policy decision, crude oil prices remain soft and global financial markets prove stable.

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